Is the economy headed for stagflation? According to the CIO of the world's largest hedge fund, Bridgewater, the answer is yes.
and high inflation, characterized by soaring consumer prices as well as high unemployment. The phenomenon ravaged the U.S. economy in the 1970s and early 1980s, as spiking oil prices, rising unemployment and easy monetary policy pushed the consumer price index as high as 14.8% in 1980, forcing Fed policymakers to raise interest rates to nearly 20% that year.
Prince said the economy is already confronting "monetary inflation," as a result of massive injections of fiscal stimulus from the federal government and the Federal Reserve during the pandemic that were used to prop up businesses and U.S. households. "The markets are under-discounting the inflation picture," he said during the World Economic Forum in Davos, Switzerland. "The sustainability, the self-reinforcing of the inflation is not discounted. The degree of tightening over time is not discounted."
Consumer prices jumped 8.3% in April on an annual basis, close to a 40-year high, and are expected to remain elevated in coming months. As a result, the Fed is embarking on its most aggressive course to tighten policy in decades, raising rates by a half-point earlier this month and signaling that similarly sized hikes are on the table at coming meetings.
There are growing fears that the Fed will trigger a recession because hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending. Bank of America, as well as Fannie Mae and Deutsche Bank, are